Obligations With Insurance Coverage Drafting Indemnification - - PowerPoint PPT Presentation

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Insurance and Contractual Indemnification: Reconciling Competing Indemnity Obligations With Insurance Coverage

Drafting Indemnification Provisions and Ensuring Adequate Coverage for Contractual Liabilities Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, APRIL 13, 2017

William K. McVisk, Shareholder, Johnson & Bell, Chicago Jessica E. Brown, Attorney, Reed Smith, Chicago

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Insurance and Contractual Indemnification: Reconciling Competing Indemnity Obligations with Insurance Coverage

William K. McVisk Johnson & Bell, Ltd. mcviskw@jbltd.com

The Wheelie

Parties:

• Plaintiff: Joe Biker
• Defendants: Big Edison Electric & Power Co.; Big Tar

Paving Contractors; Industrial City

• Insurance:

For Big Edison: SIR: $2 million First layer excess: Public Utility Insurance Co. For Big Tar: Primary: $1 million – Traveling Firemen Insurance Excess: $15 million – Traveling Firemen Insurance

6

The Accident

On July 5, 2016, Joe Biker was riding his motorcycle on a street in Industrial City. He noticed an attractive woman looking out of her window as he rode, and decided to impress her by doing a wheelie. Unfortunately, he didn’t notice that there was speed bump in the street, and when he did the wheelie, he hit the speed bump and flipped over. Joe is now a

• paraplegic. He denies actually doing the wheelie. He

alleges that the speed bump was unsafe because there were no chevrons marking the bump, so he didn’t see it coming, or he would have slowed down.

7

The Accident

• Big Edison did electric utility work under the

speed bump 5 months earlier.

• Big Tar did the excavation and repaving. It was

supposed to put chevrons on the speed bump.

• Big Edison and Industrial City were supposed to

have inspected the work when it was done.

8

The Question

• How do Industrial City, Big Edison and Big Tar

get the other parties to pay for the liability?

9

Three Primary Ways to Shift Risk

1) Contribution 2) Indemnity 3) Additional Insured Endorsement (Not discussed) Laws differ in each state, but follow patterns.

10

Is Contribution Allowed?

• Illinois – yes
• Arizona – no
• Indiana – no
• Pennsylvania – yes

11

Contribution – How it works

• Illinois

— Joint & Several liability – but if defendant is <25% at fault, joint liability limited to medical expenses. — No liability if plaintiff >50% at fault. — Each tortfeasor liable for proportionate share. — Good faith settlement with plaintiff releases contribution liability. — Employer’s contribution limited to W/C liability, unless waived by indemnity agreement.

12

Contribution – How it works

• Pennsylvania

— Joint and several liability — Comparative negligence. No recovery if plaintiff >50% at fault. — Joint tortfeasors can recover from each other for proportionate share. — Settlement with the plaintiff does not release contribution liability unless:

• Settlement reached before right to secure a money judgment for

contribution has accrued

• Settlement provides pro rata reduction of plaintiff’s recovery

against other tortfeasors for the share of the settling tortfeasor. — No contribution from employer unless employer has waived the exclusive remedy provision.

13

Contribution – How it works

• Indiana

— No joint and several liability. — No right of contribution. — Jury considers fault of all parties and non- parties who contribute. — No recovery if plaintiff >50% at fault. — Non-settling defendants get no credit for money paid by settling defendants.

14

Contribution – How it works

• Arizona

— No joint and several liability – liability is several only. — Comparative fault of plaintiff reduces recovery. No recovery if plaintiff conduct is intentional, willful or wanton. — Non-party fault considered to determine relative fault of each defendant, including defendants that settle prior to trial. — No right of contribution unless a party is vicariously liable for the conduct of another party. — Non-settling defendants get no credit for money paid by settling defendants.

15

Indemnity

• Implied Indemnity

— Illinois

• Implied indemnity where party has vicarious liability for another

party.

— Pennsylvania

• Implied indemnity for vicarious liability and active/passive

negligence.

— Indiana

• Implied indemnity for derivative liability – i.e., vicarious liability.
• No implied indemnity if party seeking indemnity has own fault.

16

Indemnity

• Implied Indemnity (cont.)

— Arizona

• Implied indemnity for principal agent – i.e., where agent

incurs liability acting on behalf of principal and agent is not at fault.

• Active passive – one party creates dangerous condition and
• ther fails in duty to keep premises safe.
• No implied indemnity where party seeking indemnity was

negligent.

17

Contractual Indemnity

• General rules in most states

— Contractual indemnity is allowed but will be strictly construed. — Will not be construed as indemnifying for own negligence unless clear. — Indemnification for own negligence prohibited by statute in certain situations, such as construction contracts in many states.

18

Contractual Indemnity

• Illinois

— Indemnity Act prohibits indemnification for own negligence in construction contracts. — Indemnity provisions in construction contracts construed as waiver of limitation on employer’s contribution liability.

19

Contractual Indemnity

• Pennsylvania

— Pass through indemnity (indemnification clause in main contract passes through to sub-contracts and sub-sub contracts) does not work unless contract language is clear and specific. — Indemnity provisions not construed as waiver of employer’s immunity from contribution unless clear and specific.

20

Contractual Indemnity

• Indiana

— Indemnity provisions in construction contracts cannot provide for indemnification of indemnitee’s sole negligence. OK if indemnitee is not solely at fault. — Subcontractors can be required to indemnify general contractor if clear and specific and general not solely at fault.

21

Insurance Coverage

• CGL Policies exclude:

— Liability assumed in contract — Liability for employee injuries

• However, both exclusions have an exception

for liability assumed in an “insured contract.”

• “Insured contract” is defined as that part of a

contract related to the insured’s business in which:

— “you assume the tort liability of another ….”

22

Additional Insurance Coverage – Where two insurers may provide coverage, whose coverages pays first?

• Co-Primary Coverage

— “Other insurance” clauses generally provide for sharing coverage. — Illinois allows insured to choose which of 2 policies on same level of coverage will apply with a “targeted tender.” John Burns Constr. Co.

• v. Indiana Ins. Co., 189 Ill.2d 570 (2000).
• Targeted tenders only work on same layer of coverage. Kajima
• Constr. Services v. St. Paul Fire & Marine Ins. Co., 227 Ill.2d 102

(2007).

23

Whose coverages pays first?

• Primary vs. Excess Coverage

— Most states require horizontal exhaustion – all primary insurance available to an insured must be exhausted before excess coverage will be

• triggered. Kajima Constr. Servs. v. St. Paul Fire &

Marine Ins. Co., 227 Ill.2d 102 (2007); Community Redevelopment Agency v. Aetna Cas. & Surety Co., 50 Cal.App.4th 329 (1996).

24

Whose coverages pays first?

• Primary vs. Excess Coverage

— Courts split on whether an SIR is “primary insurance” which must be exhausted before all excess coverage is triggered.

• Montgomery Ward & Co. v. Imperial Casualty & Indem. Co.,

81 Cal.App.4th 356 (2000) (SIR is not equivalent of primary insurance)

• Missouri Pacific R.R. Co. v. International Insurance Co., 288

Ill.App.3d 69, 81 (1997)(SIR equivalent of primary insurance for horizontal exhaustion purposes).

25

Contribution and Indemnity Among Insurers

• Equitable Contribution

— Where two insurers both cover the same risks, an insurer that pays more than its share has a right of equitable contribution from non-paying insurers — Risks must be essentially the same

• Two insurers providing A/I coverage for general

contractor, with different named insureds, do not cover the same risk

26

Contribution and Indemnity Among Insurers

• Equitable Subrogation

— Where one insurer is primarily responsible for loss, and another is secondarily responsible, if secondary insurer pays it has right of equitable subrogation — Example: Insurer A has a primary “other insurance” clause and Insurer B has excess “other insurance” clause, B can recover from A under equitable subrogation

27

Questions?

William K. McVisk Johnson & Bell, Ltd. 33 West Monroe Street, Suite 2700 Chicago, IL 60603 (312) 984-0229 mcviskw@jbltd.com

Insurance, Indemnity and Contribution: The Complex Interplay in Commercial Transactions: Negotiating the Agreement

Jessica E. Brown 312.207.2421 jebrown@reedsmith.com

Unequal Bargaining Power

30

The “Armstrong” Scenario

• We-Sell – a national retail chain

headquartered in Illinois contracted with Grill Co. to manufacture a grill to be sold under its own brand the “Armstrong Rocket.”

• We-Sell had Grill Co. manufacture

a new special fuel grill – the “Armstrong Rocket” – per We- Sell’s specifications including patented fuel type.

• The “Armstrong Rocket” became a

bestseller and millions were sold.

31

We-Sell’s Perspective

• WHAT WE-WELL WANTS
• We-Sell wants Grill Co. to provide it with an indemnity that

covers any claim that could possibly arise out of the Armstrong Rocket – even if We-Sell is solely negligent.

• We-Sell also wants to make sure that Grill Co. will defend it on

any claim.

• Finally, to protect itself against Grill Co’s possible bankruptcy,

We-Sell wants to be an additional insured under Grill Co.’s liability insurance.

• WE-SELL’S BARGAINING POWER
• We-Sell can always find another manufacturer somewhere

else if it cannot get what it wants, but Grill Co. is its only U.S.

• ption.

32

We-Sell Proposed Indemnity Provision

[Manufacturer] agrees to indemnify and hold harmless We-Sell and its agents from and against any and all claims or suits for: (i) bodily injury to all persons whether employees

• f

We-Sell

• r
• therwise, and (ii) damage to property -- arising out
• f the [Product], and all other damage, direct or

indirect, of whatsoever nature, resulting from We- Sell’s use, sale or distribution of the [Product], however caused including We-Sell’s sole or partial

• negligence. It is expressly agreed that this provision

shall survive the performance of this Agreement.

33

We-Sell Proposed Defense Provision

[Manufacturer] agrees to defend We-Sell for any claim, suit or loss allegedly attributable to bodily injury or damage to property, arising out of We-Sell’s use of the [Product], even if We-Sell is solely at fault for such bodily injury or property damage.

34

We-Sell Proposed Provisions

• WHAT WOULD BE THE EFFECT?
• By including the specific and explicit phrase

“including We-Sell’s sole or partial negligence”, We- Sell has covered its own negligence even where We-Sell is found to be solely at fault.

• We-Sell’s defense provision also explicitly covers it

if it is alleged that We-Sell is solely at fault.

• Note that the defense provision requires that Grill
• Co. do more than simply pay defense costs – Grill
• Co. must provide We-Sell with a defense.

35

Grill Co.’s Perspective

• WHAT GRILL CO. WANTS
• Grill Co. wants to provide as little indemnity to We-Sell as

possible – preferably strictly limited to its own negligence for certain acts.

• Grill Co. is fine with making Grill Co. an additional insured as

long as it does not increase Grill Co.’s premiums. (Would the coverage We-Sell is requesting cost more? Why?)

• GRILL CO.’S BARGAINING POSITION
• Grill Co. needs the contract with We-Sell because it has been

hurt by competition and the economic decline.

• Also it has developed a reputation for poor quality due to

several recalls involving explosions and deaths.

36

Grill Co. Proposed Indemnity

Grill Co. agrees to indemnify [Purchaser] for sums [Purchaser] becomes legally obligated to pay as damages for bodily injury

• r properly damage caused by " Grill Co.’s fault.” “Grill Co.’s

fault” means: (i) a manufacturing defect, design defect or negligent failure to warn with respect to products designed by Grill Co. and supplied to [Purchaser] by Grill Co. Grill Co. further agrees to indemnify [Purchaser] for reasonable legal expenses it incurs defending itself against any suits seeking such damages. Grill Co. shall have no obligation to indemnify [Purchaser] for any damages caused by [Purchaser’s] fault or for any legal expenses incurred by [Purchasers] in defending itself against suits seeking damages caused by [Purchaser’s] fault.

37

Grill Co. Proposed Provision

• WHAT WOULD BE THE EFFECT?
• Grill Co.’s provision is a very weak

indemnity, limited to where it is at fault.

• It is unlikely to cover design defects in the

proposed scenario because We-Sell designed the Armstrong Grill – Grill Co. was

• nly the manufacturer.
• It does not include a duty to defend – only a

duty to indemnify covered defense costs.

38

Negotiations

• We-Sell rejects Grill Co.’s indemnity.
• However, We-Sell prefers to have the Armstrong

Grill manufactured in the U.S. so it agrees to alter its provision to a similar “back-up” provision.

• Grill Co. needs the business so it agrees to We-

Sell’s new proposal including a duty to defend.

39

Final We-Sell – Grill Co. Indemnity

WHAT’S THE RESULT? Grill Co. agrees to indemnify and hold harmless We- Sell and its agents from and against any and all claims or suits for: (i) bodily injury to all persons whether employees of We-Sell or otherwise, and (ii) damage to property – arising out of the Armstrong Grill, and all other damage, direct or indirect, of whatsoever nature, resulting from We-Sell’s use of the Armstrong Grill, however caused. It is expressly agreed that this provision shall survive the performance of this agreement.

40

Final We-Sell – Grill Co. Defense Provision

“Grill Co. agrees to defend We-Sell for any claim, suit or loss allegedly attributable to bodily injury or damage to property, arising

• ut of We-Sell’s use of the Armstrong Grill,

even if We-Sell is partly at fault for such bodily injury or property damage.”

41

We-Sell’s Additional Insured Provision

“Grill Co. shall obtain and maintain in full force during the performance of this Contract and six months thereafter: (a) Commercial General Liability Insurance endorsed to include products/completed operations, independent contractors, contractual liability (covering We- Sell’s indemnity obligations in this contract), broad form property damage and fire liability coverage with a combined single limit of $1,000,000 per occurrence and $2,000,000 in the

• aggregate. All such policies shall name We-Sell

and its agents as additional insureds. Grill Co. shall furnish to a Certificate of Insurance evidencing such coverage.”

42

Insurance

• WHAT HAPPENS WITH THE INSURANCE
• Grill Co. agrees to We-Sell’s additional insured

provision and provides We-Sell with a certificate of insurance that shows that it has insurance with $2 million per occurrence and $4 million aggregate limits.

• We-Sell does not ask for a copy of the insurance

policy itself.

• Grill Co’s policy has the following provisions, which
• f course We-Sell doesn’t know about:
• $500,000 self-insured retention;
• The additional insured provision limits coverage

to the extent required by contract.

43

Unfortunately….

• The Armstrong Rocket had

a tendency to really “take

• ff” – exploding right out of

consumers backyards

• This resulted in numerous

lawsuits for property damage, bodily injury and injury to wildlife (geese) against We-Sell and Grill Co.

• The suits alleged only

design defects.

44

Who Pays?

• We-Sell seeks protection from Grill Co. and its

insurer

• Grill Co. asserts that it does not owe We-Sell either

indemnity or defense because the lawsuits allege design defects and We-Sell designed the Armstrong Rocket so is solely negligent.

• Grill Co’s Insurer asserts that there is no coverage

because (1) the $500,000 SIR and (2) the insurance is limited to the indemnity provision and We-Sell is solely negligent.

45

Result

• For suits that allege only a design defect:
• We-Sell probably won’t be indemnified by Grill
• Co. or covered for indemnity under its insurance

because We-Sell is the designer.

• However, if Grill Co. is also alleged to be the

designer, We-Sell may be entitled to a defense.

• For suits that allege manufacturing as well as

design defects:

• We-Sell is probably covered by Grill Co.’s

indemnity.

• We-Sell is also probably covered by insurance,

but only after the SIR is exhausted – Grill Co. may be required to pay the amounts in the SIR.

46

Equal Bargaining Power

47

The Super Lawn Scenario

• Eco-Solutions, a small company

based in Ohio, has developed “Super Lawn” a lawn supplement that fertilizes and takes care of all weeds leaving a perfect healthy

• lawn. It is non-toxic and actually

binds with toxins eliminating them. Eco-Solutions holds a patent on “Super-Lawn” that does not expire until 2027.

• “Super Lawn” is a very hot product

and We-Sell would like to sell it at its stores.

• Eco-Solutions would like to

distribute “Super Lawn” through We-Sell because of its market share, but does have many other retailers who would like to distribute its as well.

48

Negotiations

• We-Sell would like to have its standard indemnity and defense

provisions discussed previously.

• WHAT HAPPENS
• Eco-Solutions rejects the We-Sell indemnity and defense

provisions and states that it would like to be indemnified by We-Sell.

• Although Eco-Solutions is a much smaller company, We-Sell

has to bargain to get this one of kind product in its stores.

49

Reciprocal Indemnity Provision

• (a) Eco-Solutions agrees to indemnify We-Sell for sums We-

Sell becomes legally obligated to pay as damages for bodily injury or properly damage caused by solely by "Eco-Solutions’ negligence.” "Eco-Solutions’ negligence” means: (i) a manufacturing defect, design defect or negligent failure to warn with respect to products designed by Eco-Solutions and supplied to We-Sell by Eco-Solutions. Eco-Solutions further agrees to indemnify We-Sell for reasonable legal expenses it incurs defending itself against any suits seeking such

• damages. Eco-Solutions shall have no obligation to indemnify

We-Sell for any damages caused by We-Sell’s fault or for any legal expenses incurred by We-Sell in defending itself against suits seeking damages caused by We-Sell’s fault. Eco- Solutions shall also have no duty to indemnify We-Sell, if its product is changed or altered in any way.

50

Reciprocal Indemnity Provision

• (b) We-Sell agrees to indemnify Eco-Solutions for sums Eco-

Solutions becomes legally obligated to pay as damages for bodily injury or properly damage caused by solely by “We- Sell’s negligence.” “We-Sell’s negligence” means: (i) any negligence by We-Sell in the distribution, sale or use of Eco- Solution’s products, including failure to warn and (ii) any change or alteration to Eco-Solution’s product by We-Sell. We- Sell further agrees to indemnify Eco-Solutions for reasonable legal expenses it incurs defending itself against any suits seeking such damages. We-Sell shall have no obligation to indemnify Eco-Solutions for any damages caused by Eco- Solutions’ fault or for any legal expenses incurred by Eco- Solutions in defending itself against suits seeking damages caused by Eco-Solutions fault.

51

Reciprocal Indemnity Provision

• EFFECT OF PROVISIONS
• Under the reciprocal indemnity, neither party

indemnifies the other unless the suit is based on the sole negligence of one party for specific acts.

• Additionally, neither party has a duty to

defend the other – at most each party must pay the other’s reasonable defense costs if a suit is based on its sole negligence.

52

Defense Provisions to Consider

• An indemnitor can recoup the costs of defending an

indemnitee if the indemnitee is found solely liable in an adjudication.

• The indemnitor controls the defense of the litigation.
• But, consider what will happen if there is a conflict
• f interest? Can the indemnitor limit costs?
• Some insurance policies contain provisions that will

cover the cost of defending the indemnitee jointly with the indemnitor if there is no conflict of interest between the parties.

Which Goes First? Indemnity or Insurance?

• The law is sparse and unclear on this point.
• The insurance policy won’t say.
• Usually the indemnity won’t say – but it should.
• Suggested Provision:

It is the express intent of the parties that the insurance identified in Paragraph X, naming We-Sell as an additional insured, respond first and defend and indemnify We-Sell and its agents with respect to any and all claims or suits arising out

• f the performance or breach of this Agreement by Grill Co. If

and only if such insurance does not apply or is otherwise not available with respect to a particular matter, the indemnity provisions in this paragraph will apply.

54